Egypt: Economic issues and the second presidential term

Abdel Fattah El-Gebaly
Wednesday 18 Apr 2018

President El-Sisi's victory with 97% of the votes displays Egyptians' desire to complete the country's current path of development and reformation. It is now necessary to inquire about the expectations of this economic reform programme in achieving the outcomes desired by the sweeping majority of Egyptian society in the face of the current socio-economic conditions. Given the Egyptian parliament's discussion of the economic and social plan, as well as new budget legislations for the fiscal year 2018/2019, now is the time.

We are in the stage of generating new economic policy in joint cooperation between the presidency, the government and the parliament. Discussion of this legislation must take into consideration its effectiveness in improving the society's living standards, increasing employment, absorbing the surplus labour and reducing price hikes.

Economic theory suggests that the success of certain economic policies depends on their objectives and continuation of efforts to achieve them. These objectives basically require the growth of Gross Domestic Product to outpace that of population in order to achieve an improvement in living standards, create job opportunities to all labour market entrants, meet the prerequisites of price stability, the equitable distribution of the fruits of growth among all of society’s segments and decrease the disparity in income

Such objectives would gain public acceptance and partisan consent.

So far the measures taken by the Egyptian government and legal changes introduced during the first presidential term have focused on rebalancing the basics of the economy, i.e., the general budget.

This was accomplished through decreasing the financial deficit by reviewing the public expenditure policies and governmental investment, improving the investment climate (local and foreign) through decreasing public expenditure in a number of fields, especially commodities’ subsidies.

Attempts to modify the taxation system while adjusting exchange and interest rates also was aimed at these basic goals, as were the abolishing of restrictions on current transactions with the aim of reforming the external sector and mending flaws in the balance of payments.

We should keep in mind that the inflated exchange rate of the Egyptian pound led to the economy’s further loss of competitiveness and encouraged an increase in exportation, which consequently worsened the trade balance problems.

This is not to mention the expansion of infrastructure projects such as roads, bridges and electrical power. Then came the attempt to mend this policy’s negative consequences on the poorer segments’ real incomes in the form of expanding some social protection programmes such as Takaful and Karama, increasing the monthly cash subsidies for ration cards and raising the value of taxation exemption.

Official indicators point out successes. The total deficit in the state budget decreased to 10.9 percent in the year 2016/2017, in comparison with 12.5 percent in 2015/2016. The annual general and basic inflation rates also decreased to register in February 2018 at about 14.4 percent and 11.9 percent, respectively, after they had reached a peak in July 2017 of 33 percent and 35.3 percent.

Foreign currency reserves also reached 42.6 billion dollars at the end of March 2018 in comparison with 13.4 billion at the end of March 2013.

So all these indicators show positive improvement that has led to a regaining of trust in the national economy and, as a result, the foreign direct investment rate increased from 2.1 percent in the year 2015/2016 to 3.4 percent in the year 2016/2017.

However, there are still several important and substantial problems in the Egyptian economy. Foremost among them is the increase in poverty rates (reaching 27.6 percent and concentrated in Upper Egypt’s governorates), the increase in unemployment rate reaching 12 percent, although recently it decreased somewhat, but it is still too high -- especially among the youth. And the public debt (both internal and external) amounts to 106 percent of the GDP.

All the aforementioned is accompanied by structural imbalances in the economy which result in weak productivity, slow growth of sectors such as industry and agriculture, a sharp decrease in investment rates which do not exceed 15 percent of the GDP and decline in the savings rate to less than 5 percent.

Eliminating these problems requires moving towards a second and important stage in reform which requires the organised and effective expansion of productive bases by mobilising local resources in the most efficient way possible.

These efforts should be exerted to expand the implementation of urgent policies needed to stimulate investment and economic activity in general.

This will be achieved through the creation of a strong economic environment and reasonable industrial base with agricultural growth helping to meet basic needs and the optimum utilisation of available energies with the aim of absorbing unemployment and raising the standards of living.

Most studies conducted on successful developmental experiences highlight several important lessons.

Among them is that the development process is an extremely complicated. It isn’t linked to simple formulas and equations, but rather is chiefly related to the economic and social conditions of every unique country.

Hence, growth should be balanced and capable of creating jobs and social services sufficient that everybody lives in safety and dignity. These matters require the modification of the current economic path and steering it in a direction towards productivity which will overcome problems.

We mean to move it towards the path of “comprehensive containment development," which sees that growth and fair distribution are two faces of the same coin and that social justice can be considered as a driving force of economic growth.

This kind of development is based upon the fact that suitable policies for long-term economic growth are the ones that are tied to improving revenue distribution among all segments of society. An integrated system aiming at increasing development rates, achieving welfare and raising the individuals’ standards of living can achieve this.

From this perspective, confronting the problems from which we suffer requires a political will that activates the role of the state in order to recompense the shortcomings of this system. There is a need for governmental involvement to adjust the market process.

The cornerstone in achieving “comprehensive containment development” is increasing employment and raising productivity. This won’t take place except through activating the democratic market mechanisms, vitalising the price body and supporting the private sector while raising the state’s efficiency in administering productivity process.

There are several issues of concern to ordinary citizens that must be treated with extensive care by economic decision-makers, namely the modest levels of health, educational and social services, the erosion of agricultural lands due to urban crawl, high illiteracy rates and other problems. We urgently need the adoption of a number of policies and measures that help in achieving this desired economic breakthrough.

Any developmental initiative in Egypt is confronted with one main challenge: How to turn the society into a productive one? And this drives us to ask: What is the way of achieving the required step within society to make it more productively efficient and more capable of using modern technological methods and incorporate these methods into the national economy?

We should keep in mind the weak socioeconomic segments and low-income earners by raising their capacity to earn a living and reform the subsidies policy in a way that does not harm them. We must also continue to combat corruption in all its forms while fulfilling the desired administrative reform.

None of the the aforementioned will materialise except for via a comprehensive institutional reform based on the foundations of good governance as a key entry point for production. These goals cannot be attained except through increasing investment rates in order to reach targeted growth rates necessary to absorb newcomers in the labour market. This can be accomplished via restarting suspended factories or re-assessing those providing lesser output than their productive capacity, settling real estate disputes related to land pricing, exploitation and utilisation rights. General investment should be directed towards the completion and development of infrastructure accompanied with giving a strong push towards mega-national projects in the east of Port Said, in the northwest of the Suez Gulf, Sinai and all of Upper Egypt’s governorates.

Accomplishing this can be done through encouraging extensive growth employment and supporting fast-growing modern sectors, as well as supporting the export and manufacturing sectors in order to raise productivity, competitiveness and employment levels.

The Egyptian industrial sector's contribution to the GDP remains very limited, and is actually decreasing year over year. Moreover, Egyptian manufacturing is characterised by a weak industrial base and declining productivity. Egyptian industry’s biggest problem lies in the added value still being built upon on natural resources, which does not encourage high economic growth. Thus, we should prioritize modifying the current structure and developing a new strategy for Egyptian industrial sector. Providing a suitable climate for serious investment is based mainly on increasing the investors’ ability to estimate expected economic revenues and risks and removing obstacles hindering the capability of some institutions to carry out their missions.

All the aforementioned and other matters would enable serious investment to interact with market forces and compete in a climate of transparency while the state’s institutions should provide a mixture of support and effective supervision.

This will not happen except through tightening controls on ports to stop smuggling, which has flooded the local market, harming local industry. Legislation hindering investments should be reviewed and that found in need of amendment should be prepared hand-in-hand with new laws protecting competition, preventing monopolistic practice, fighting goods dumping and protecting consumers.

It is also necessary to expand local manufacturing by determining new expandable industries, such as iron and steel, textiles and clothing industry, petrochemicals and intermediate industries. Efforts should also be exerted to maintain a continuous link between the main industries and their feeding industries. All the aforementioned requires developing the state’s technological capabilities, especially considering that future wars will rely first and foremost on technological capabilities.

If we want our beloved Egypt to achieve a breakthrough and occupy an advanced position on the world map, we have no other way except to build and develop a local technological base.

We need a concerted and continuous effort in which efforts in all institutions are unified towards this goal. It should be done in a way that deepens the ever-increasing role of technology and scientific research in creating an Egyptian tech sector capable of competing and concentrating on non-traditional industries with high added value and competitive advantage in international markets.

Since the Egyptian labour force enjoys the advantages of competitive wages, it can provide the state with an asset in the field of intensive labour industries. Egypt’s climate allows diversification of crops and its geographical location -- lying in close proximity to Europe, North Africa and the Far East -- offers quick accessibility to markets and opens up opportunities for it to be a center of transport and other services and a base from which exports depart for all of the world markets.

The writer is former Chairman of the Board of Al-Ahram Establishment.

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